What Happened?
Shares of electric vehicle pioneer Tesla (NASDAQ:TSLA) fell 7.1% in the afternoon session as stocks tumbled (Nasdaq down 2%, S&P 500 down 1.5%) after the Fed signaled that there would be fewer cuts ahead (than expected) during the December 2024 FOMC meeting.
This announcement followed the committee's decision to reduce rates by 0.25% to a range of 4.25%–4.5%, which was largely in line with consensus forecasts. Looking ahead to 2025, the Fed is expected to implement two quarter-point rate cuts, suggesting that future policy adjustments will be implemented at a slower pace, with the committee reiterating a data-driven approach that factors future inflation data and updates on the labor market.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Tesla? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Tesla’s shares are extremely volatile and have had 106 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was about 2 months ago when the stock gained 19.1% on the news that the company reported third quarter results that beat analysts' gross margin expectations (19.8% vs 16.9%). That helped it beat on adjusted earnings per share, Adjusted EBITDA, and Free Cash Flow. Additionally, Tesla saw vehicle delivery growth of 6.4% quarter on quarter, the first time the company recorded quarter on quarter delivery growth in 2024.
Looking ahead, guidance was encouraging as Tesla is expected to sell more vehicles in 2024 compared to the previous year. This suggests deliveries are likely to come in significantly ahead of Wall Street's estimates in the fourth quarter of 2024. In addition, management guided for 20-30% growth in vehicles in 2025. Investors also reacted positively to the news of Tesla's cheaper electric vehicle, which is on track to begin production next year. Revenue did miss coming in at $25.18 billion vs the expectation of $25.4 billion. However, this was heavily outweighed by the positive results.
Tesla is up 78.9% since the beginning of the year, and at $444.50 per share, it is trading close to its 52-week high of $479.86 from December 2024. Investors who bought $1,000 worth of Tesla’s shares 5 years ago would now be looking at an investment worth $16,959.
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